Japan’s Still-Clogged Economic Plumbing

There are plenty of hopeful signs that Japan’s economy is shaking off years of torpor, from a newly vibrant stock market to shopkeepers raising prices and workers actually asking for wage increases — and getting them.

Some background: One hallmark of the country’s “lost decades” was a dysfunctional financial system, where banks just sat on trillions of yen in deposits, rather than putting it work to through loans or investments. In a shrinking, deflationary economy, that made sense. Cash grows in value — when prices fall, Y100 buys more tomorrow then it does today — and may be one of the best investments around, with so many potential borrowers struggling or failing. The banks’ decision to sit on money in turn dried up the pool of capital normally available for investments, further stunting growth.

The banks didn’t literally sit on all their money. They used much of it to buy Japanese Government Bonds, a low-return, ultra-safe investment. But from the standpoint of the economy, it had the same dulling effect: the cash just went to pay government bills, rather than help companies or consumers.

Enter Haruhiko Kuroda and his monetary bazooka fired off a year ago. The new Bank of Japan governor identified three main channels to help spur fresh economic activity. One was lowering interest rates, making credit cheaper. Another was raising “inflation expectations,” persuading companies and consumers that prices would rise, getting them to spend more now. The IMF’s new annual “Global Financial Stability Report” released Wednesday says both of those have been relatively successful.

But the IMF report shows how the third channel — a hoped-for “portfolio rebalancing” by the banks — hasn’t quite worked out as planned. Under Mr. Kuroda, the BOJ has ramped up its own purchases of JGBs, in part to crowd banks out of the market and force them to do something else with the cash.

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